The Antitrust Book Boomerang

A federal judge unwisely stepped in on Amazon's side, and now we're seeing the results.

WSJ article by L. Gordon Crovitz. Excerpts:

"The main impact of the antitrust case the government brought last year against Apple was to entrench Amazon as the all-powerful online retailer, enabling it to engage in business practices available only to dominant players."

"Amazon has blocked advance orders of Hachette books,"

"It raised prices on Hachette books. It's telling customers that delivery for print books from Hachette will take weeks and is recommending books from other publishers instead."

"Under its preferred "wholesale model," retailers like Amazon, not publishers, set prices. Amazon negotiates different revenue splits with different publishers and "co-op" fees to promote particular books.

When Apple launched the iPad to compete with Amazon's Kindle, it made the business innovation of substituting the wholesale model with a simple revenue share with publishers—the "agency model.""

"It wanted publishers to control pricing so as to encourage product development in e-books. For apps and games, Apple lets developers set the price and takes a flat 30% of sales. Apple offered e-book publishers the same deal."

"Judge Denise Cote dictated the outcome by ruling against Apple. She acknowledged that the agency model is common in many industries but insisted publishers be subject to Amazon's wholesale approach"

"Amazon is happy to use its court-mandated leverage to re-establish control over pricing and the retailer-publisher relationship. Amazon uses e-books as loss leaders to boost sales of its profitable Kindles and Amazon Prime subscriptions. Amazon reportedly wants a larger revenue share for discounted e-books"

"In ruling against Apple, Judge Cote assured that her ruling would "restore competition" in the e-book market. Instead, Amazon's market share has soared"

"Some book authors want the Justice Department to go after Amazon now, but a better approach would be to get out of the way."

"Publishers should also be able to develop higher-priced premium e-books with audio, video and Web links. They rarely do because Amazon sets prices too low to make them commercially viable.

Judge Cote is learning that the pace of change on the Internet embarrasses anyone arrogant enough to claim to know which technologies or business models must be used."